Impact of GST on Hospitality Industry

It has been a few months since GST has been introduced and is in effect. As GST is an imperturbable tax, the effects of it can be seen across verticals. Many industries have experienced an impact of GST either benefitting it or affecting it negatively. Hospitality industry is one such market that has been affected by GST.

You have realised that luxury is now coming at a bigger price and compromise on the luxury hotel stay has to be made. Let’s throw some light on the effects of the new tax regime on the industry and how the previous tax regime worked.

Previous tax regime

There were multiple taxes levied under the previous tax regime including VAT and Luxury Tax that were levied by the State Government and Service Tax which was levied by the Central Government. To make the process more bothersome, the VAT levied was different in different States. The VAT rate were between 12 to 14.5 percent, whereas the average luxury tax, influenced by the room tariff, was around 8 to 10 percent. In addition, if a hotel room tariff exceeded Rs. 1000 you were required to pay Service tax at 9 percent (40 percent abatement). Service tax was 6 percent (60 percent abatement) for foods and beverages in restaurants apart from the VAT amount levied.

Therefore, the effect of VAT, service tax and luxury tax combined was around 20 to 27 percent with the scope of claiming the input tax credit (ITC) against the VAT liability, limited.

GST Regime – Impact on hospitality industry

The hospitality industry benefits with a consistent taxation system and benefits with input tax credit as well after the GST implementation. Let’s look at the GST rates on hotel room.

Tariff Per Night

GST Rate

Up to Rs. 999

–

Rs. 1000-2500

12%

Rs. 2500-7500

18%

Above Rs 7500

28%

Star ratings of hotels are irrelevant for governing the GST rate applicable as the accommodation in any hotel that has declared tariff of up to 7500 per unit per day will attract a GST at 18 percent, irrespective of their star rating.

Let’s look at the table providing total cost to the end customer, before and after GST regime was introduced.

Hotel Room

Before GST

After GST

Tariff

2200

2200

Luxury Charge (8%)

176

–

Service Tax (9%)

198

–

GST 12%

–

264

Total

2574

2464

Therefore, the net cost of the affordable hotel room has naturally come down with GST. Therefore, the final cost that the end customer is required to pay is decreased after GST implementation, which will further attract more visitors in the country. Having more tourists will not only boost the growth of the tourism sector of the country but will also increase the government revenue. Additionally, every other service that will be provided by the Restaurants and Hotels is said to be ‘supply’ and GST is applied on the same to benefit the end customer

However, a bigger challenge lies ahead as India cannot benefit with the GST rates in the overall Asian tourism and hospitality market. The tax slab in India remains quite high, as compared to its Asian counterparts, which can have adverse effects in the hospitality sector in the long run. Where Japan levies a tax rate at 8 percent in the hospitality sector and Singapore levies at 7 percent, India definitely stands at a weak spot.

There is a consistency in tax facilitating administration which is smooth and clear for consumers, with GST coming into effect. It is a simple breakup which will prove to be easy for the common man to comprehend. Along with that, the hospitality industry players will be able to claim their input tax credit benefit easily. With the previous tax regime, claiming input tax credit benefit on raw materials was a difficult task but with the new GST regime, it has become simple.

Though the Indian Hospitality industry has been expected to proliferate by the year 2024, the high rate of GST might work against this story. However, the fact cannot be missed that with GST consumers will benefit from reduced costs while for the industry there will be a boost in demand and increased profits. Only, if in the time to come, the rate is reduced and revised, India’s successful growth story in the Asian subcontinent might work.

Sony works as a Tax Researcher at H&R Block India. She makes taxes easy to understand for people. She creates content for the website, marketing activities and social media. She carries experience in creating a wide variety of content like blogs, guides, press releases, research papers, etc.